New Zealand hikes interest rates as inflation and housing pressures intensify
New Zealand has largely kept away from Covid-19 by closing itself off to the outside world, a policy accompanied by stimulus measures to keep the economy moving. Today, the resulting labor shortages and increasing demand, especially for housing, have led it to become one of the first developed economies to raise interest rates since the United States. start of the pandemic.
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The Reserve Bank of New Zealand has raised its policy rate to 0.5%, from a record high of 0.25%, and has signaled further increases over the next year as it seeks to contain inflation fueled by rising oil prices, rising transportation costs and supply chain disruptions. He said the increase would also push up mortgage rates and thus help cool home prices, which have risen about 30% over the past year.
The policy challenges are different from when the pandemic started, the central bank said.
“Demand deficits are less of a problem than capacity constraints in the economy given the effectiveness of government support and the resilience of household and business balance sheets,” said RBNZ. He also highlighted the risk that some capacity bottlenecks persist now that the South Pacific nation ends its efforts to eliminate the coronavirus locally.
New Zealand offers an overview of the challenges countries may face as they emerge from the pandemic. Rising household debt and inflation have become a greater threat to some economies than any resurgence of Covid-19 driven by the Delta variant. South Korea and Norway have already tightened monetary policies, while interest rates in more volatile emerging economies, from Brazil to Turkey, have also increased.
At the east coast port of Tauranga, a hub for container traffic, a lack of workers is limiting capacity as demand recovers from the pandemic. Global maritime congestion has disrupted schedules, adding to demands from port staff, spokeswoman Rochelle Lockley said.
The Bay of Plenty area, where the port is located, is known for its kiwifruit industry, which relies on a seasonal workforce from overseas. The closed border means that the competition for workers is fierce. In many cases, the port is in a duel with its own customers for workers such as longshoremen, freight handlers and operators of the giant machines that move the containers, Ms Lockley said.
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New Zealand’s unemployment rate fell to 4.0% in the three months to June.
The border closure has also exacerbated the shortage of health workers. New Zealand has around 1,000 vacant qualified nursing positions, a shortfall of 20%.
Carolyn Cooper, managing director of Bupa New Zealand, which runs nursing homes and retirement villages, said to retain staff she had been increasing salaries at a faster rate than her funding had increased.
“It is not viable to continue in this way,” she said, but “otherwise we would not have staff.”
Rising wages add to price pressures in New Zealand’s economy, including rising prices for gasoline and agricultural products such as tomatoes and cucumbers.
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Inflation expectations are now above the upper end of the Reserve Bank of New Zealand’s 1.0% to 3.0% target range. On Tuesday, the benchmark Brent crude oil price hit its highest level since October 2018, which, for a country dependent on oil imports, portends further inflationary pressures to come.
The main objectives of the RBNZ are full employment and an annual inflation of 2% in the medium term. However, the country’s government asked it earlier this year to factor housing prices into monetary policy decisions.
New Zealand’s response to the pandemic has sparked a local housing boom. The cost of building a new home was the main contributor to inflation in the three months leading up to June, with businesses reporting shortages of building materials and rising labor costs.
In March of last year, the central bank cut its key rate 0.75 percentage points to 0.25% to support activity. This has made new home loans more attractive to homeowners and speculators. The rise in the median home price in New Zealand over the past year is one of the fastest among the 38 member countries of the Organization for Economic Co-operation and Development.
The central bank has sought to calm the housing market with credit restrictions, while the government has cut tax breaks for homeowners, but house prices have continued to rise. Around the world, an increase in home values during the pandemic is sparking new debates about housing affordability. Australia’s financial regulator on Wednesday raised the minimum interest rate cushion it expects lenders to use to assess the ability of new borrowers to repay their home loans.
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The rhetoric of the Reserve Bank of New Zealand generally downplays the role of housing in its monetary policy decisions, even if inflation, employment, and house prices all point in the same direction, it may be appropriate to include it now, said Gareth Kiernan, chief forecaster at Infometrics, an economic consulting firm.
It would “help deflect any political criticism that might otherwise come their way for not doing enough to slow down the housing market,” he said.
The central bank forecast in August that the cash rate would reach 1.6% by the end of 2022 and 2.0% in the second half of 2023, although some economists doubt it will exceed 1.5%. The new projections are not expected before the end of November.
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